Infrastrutture Wireless Italiane SpA

MIL:INW

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, good afternoon, and welcome to INWIT First Quarter '20 Financial Results Conference Call. Emanuela Martinelli, Head of Finance and Investor Relations, will introduce the event.

[Emanuela Martinelli, executive]

Ladies and gentlemen, good afternoon. Welcome to the first Q '20 results presentation, and thank you for attending our conference call. We do hope that all of you and your families are fine and in good health.

As usual, our CEO, Mr. Giovanni Ferigo; and our new CFO, Mr. Diego Galli, will provide you with an update on our first Q '20 operating and financial performance. And then we'll be available to answer your questions.

Now you can take note of our disclaimer policy that you should now see on Slide #2. Let me highlight that the reported data refer to the financial statement at March 31, 2020. The data refer to stand-alone figures until March 30, 2020.

Now I leave the floor to Mr. Giovanni Ferigo, who will guide you through the presentation. As usual, a Q&A session will follow the result presentation. [Operator Instructions]

Giovanni, over to you.

[Giovanni Ferigo, executive]

Thank you, Emanuela. Good afternoon, everybody. Let me guide you through the presentation by starting with Slide #3. As you know, the merger has been completed at the end of the March and the new INWIT was born. We have come a long way to reach this stage, and I'm very happy that the new journey have finally start. As part of the journey, as announced, the extraordinary dividend has been paid in April, and the ordinary one will be paid in May.

Today, we will share with you the results of the last quarter of INWIT stand-alone, and we will give some insight on how the new INWIT is progressing.

Let's go through the highlights reported on Slide 5, referring to INWIT stand-alone since Vodafone Tower has been consolidated only on the last day of March. Reported revenues grew by 8.5% compared to Q1 2019. Recurring revenue grew by 1.3%, excluding EUR 6.0 million (sic) [ EUR 6.8 million ] nonrecurring item. EBITDA shows a 6.3% growth year-over-year. Recurring EBITDA grew by 4.1% when removing EUR 1.8 million net one-off items.

Finally, free cash flow reached EUR 50 million, up 16.1% year-over-year, confirming sound cash generation. The tenancy ratio increased up to 1.96x.

Today, we have our new CFO, Diego, who joined INWIT in April, bringing his sound skills and experience in the telecommunications sector.

I hand over now to Diego, who will provide further details on the first quarter results.

[Diego Galli, executive]

Thank you, Giovanni, and good evening to you all. I'm very happy to be part of this new exciting journey of INWIT.

And going to Slide 6 to give more some details on the revenue trend. So the first quarter revenues accounted for EUR 103 million. And talking about the 3 components. The first component related to revenues from TIM that is up to EUR 66.3 million that shows 0.5% year-on-year growth. This reflects the Master Service Agreement with TIM and reflects the inflation -- 2019 inflation that has been broadly the half of 2018 inflation.

The second component is revenues from other operators and others, up to EUR 24.4 million, 2% year-on-year increase. This is the result of an increase in volume, mostly driven by fixed wireless access operator.

Third, new sites and new services. Here, the revenue is EUR 12.3 million, this includes the EUR 6.8 million nonrecurring revenues. Let me explain well what is this one-off item about. This is related to the full consideration of previous year upfront fee payments made by TIM under the new site hospitality contract. This fee and these revenues were deferred through the length of the contract. Now these contracts have been terminated as they have been incorporating the new MSA. As a consequence, there is the accounting release to the P&L of the deferred revenues. Removing the impact of the nonrecurring revenues, the growth is 10% year-on-year, driven by backhauling and DAS increase.

So as Giovanni has already mentioned, total reported revenues is up 8.5%. The underlying growth, removing nonrecurring revenues, is 1.4%. And this is broadly the result of lower inflation rate on revenues from TIM and OLO growth a little bit slower than previous quarter and growth in fixed wireless access, backhauling and DAS.

Moving now to Slide 7. There are some operational KPIs, and I would like to start from the bottom left where we can see the new OLO tenants. And we can see that in the quarter, there have been 150 additions, mostly driven by fixed wireless access, while there was a small increase driven by traditional MNOs, which we expect to accelerate again in the next quarter. The tenancy ratio moved to 1.96, a slight increase compared to previous quarter when it was 1.95.

Moving to the next slide, Slide 8. There are further KPIs in terms of volume of activity. We can see that on -- in the new sites, we reached 600. And in the quarter, 50 new sites were deployed after several quarters actually without any addition due to the stand-still period. Also in the quarter, 100 remote units were added, and we achieved 3,500 small cell and DAS. Finally, on backhauling, we added 150 new links, and we passed the mark of 1,000 backhauling connections.

Moving to Slide 9, back to the main financials. On the EBITDA, we can see that in the quarter, we achieved EUR 88 million, and this means a 6.3% year-on-year increase. When removing the exceptional nonrecurring items, we should remove the EUR 6.8 million revenues as well as EUR 5 million nonrecurring costs related to the merger transaction. As a result, the underlying recurring EBITDA has grown by 4.1%. The same slide, we can see CapEx at EUR 8.1 million, in line with previous quarters, and recurring free cash flow that has grown by 16% up to EUR 50 million.

Moving to Slide 10. We can see the breakdown of the P&L., where I would like to highlight the D&A of a EUR 31.3 million, including EUR 27 million related to the IFRS 16 amortization. EBIT reached EUR 56.7 million, showing a 9.6% year-on-year and overall, 55% EBIT margin.

Net income is up to EUR 33.5 million, showing a 3.4% year-on-year increase after interest cost, which reflect the impact of the new debt commitment fees.

Moving to the last slide from my side on the cash flow dynamic on Slide 11. We can see that we achieved the recurring free cash flow of EUR 50.3 million that is up year-on-year by 16%. This is the result of the positive working capital movement, actually, that was negative by EUR 4.7 million, but anyway better than last year. And moving to cash flow to equity. We reported EUR 31.7 million driven by development CapEx and creditors due to Q4 spend.

Lastly, I would like to underline that the net cash flow includes payments to Vodafone Towers minority stake of EUR 2.1 billion and the financial charges linked to the new bank financing. This is the last slide from my side.

And before handing over to Giovanni, I would like to ask you a couple of minutes of patience because in line with the COVID-19 safety instructions, now we need to pause a few seconds to allow a switch of the interpreter in the book.

[Giovanni Ferigo, executive]

Okay. We can continue. Thank you, Diego. Starting from Page 13, I'm pleased to share some key figures related to the new INWIT. The number of sites is 22,100, and the number of tenants is roughly 40,000. Tenancy ratio is about 1.8x, lower than the one showed before, as it has been impacted by the lower tenancy ratio of Vodafone Towers.

On the top right of the slide, you can see some financial data. This is the pro forma data, including INWIT numbers as reported as well as the Vodafone Tower financials. This data don't reflect the new MSAs, which has started in April. Such data just aims to give an indication of the new entry. As you can see, the pro forma combination of INWIT and Vodafone Tower showed revenues of EUR 190.3 million and EBITDA of EUR 167.1 million. EBITDA margin is 87.8%, and anchor tenant revenue is 85%. As expected, the company has doubled its size.

Moving to Slide 14, we see the net financial position at the end of March of EUR 3.3 billion. This implies net debt on EBITDA at 4.9x. The figure doesn't include the extraordinary dividend paid in Q2 of EUR 570 million. As you may remember, we raised EUR 3 billion bank loans and that we have partially used for the Vodafone Tower acquisition in Q1 and the extraordinary dividend in Q2. The drawn sums amount to EUR 2.2 billion, EUR 2.15 billion as of March and EUR 2.7 billion following the extraordinary dividend in Q2.

I'm pleased also to mention that INWIT has been assigned the issuer rating by Standard & Poor's and Fitch Ratings. Fitch Ratings has assigned INWIT an investing grade BBB- rating with stable outlook, while Standard & Poor's has assigned the company a long-term issuer credit rating of BB+ with stable outlook. The rating reflects the solidity of the business and its growth potential and will allow us to optimize the capital structure.

Now I would like to move from figures to the business update. As you can see on Slide 17 (sic) [ Slide 15 ], a new governance is in place, in line with the best practices, and the new Board has already met 3 times. I would like to point out that a sustainability committee has been set up. It ensures support on matter of strategic importance and the achievements of the sustainable development goals. You may remember that last quarter, we presented the company's 3-year plan of -- for sustainable development in all areas of ESG, environmental, social, governance, and we are fully committed to deliver it.

Moving to Slide 16. I'm also very pleased to say that we have already implemented a new organization and the management team is in place. The new organization is set up to focus on the key company objectives. For instance, Massimo is in charge of the management of MSAs to ensure contractual commitments are timely executed and on both sides, while also supporting the innovation road map. Francesco is in charge of real estate, bringing his remarkable experience in optimizing lease cost. Elisa knows INWIT very well, and she is focused on rapid and efficient deployment and maintenance. And Gabriele is focused on developing the revenue from OLO and the new business.

They are all supported by the functional leaders who are all senior staff with strong telco experience. We are building a very strong and committed team, which represents a real intangible asset for us. Last week, it was exciting to have our company all hands with all the 200 people working for INWIT attending a digital meeting.

So moving to Page 17. We are now up and running. That is the title of this meeting. We didn't have any impact from COVID. INWIT has been considered an essential services and 100% of the team has been working from home. All suppliers, too, have been operating following the mandatory safety precaution. We are now managing a visible pipeline of new opportunities that includes new PoPs for Vodafone and TIMs, the growth of OLO, an increasing interest for the fixed wireless access operators and backhauling to support the increased demand of data.

We also implemented interim solution for DAS. You know that I am passionate for innovation. So let me tell you about the solution we implemented in Sorrento where we put a small cell under a manhole or about the coverage of the Apple Academy in the Naples university campus that has just been finalized. And in these challenging days, we provide micro coverage in 18 hospitals to grant a better connectivity that has been used by all mobile operators.

Finally, on Slide 18, I would like to sum up on achievements and on the way forward. In the last few weeks, we complemented (sic) [ completed ] the merger. We paid the special dividend, and we will pay the ordinary one in a few days. We set up a new organization, and the new management team is fully operational. We see demand coming from the accelerated data growth and the need for efficiency. We have a solid order book, and we are up and running to deliver, enable for the operator a faster 5G rollout, wider 5G coverage and enhanced network capacity. Furthermore, we are ready to meet all DAS and indoor coverage demand. We see interest in bank office, for example, branches and touch payment transaction. Okay. Emanuela?

[Emanuela Martinelli, executive]

Giovanni, Diego, thank you. We can now open the Q&A session, where our CEO, Giovanni Ferigo; and our CFO, Diego Galli, will answer your questions. Please remember that one single question per person is allowed so that everyone may speak.

[Operator]

[Operator Instructions] First question is from Simon Coles from Barclays.

[Simon Coles, analyst]

Simon from Barclays. It's just on a comment you made about FWA players are driving the tenancy ratio growth. When I think back to the pro forma target for the EUR 600 million free cash flow number in the long term, part of that is driven by driving the tenancy ratio growth. Should we assume that a lot of that growth in the future is coming more from FWA players rather than MNOs? Or are you seeing increased business from, say, Wind Tre and Iliad because we've obviously seen a bit of a slowdown from certainly Wind Tre in the past year. So any more color and comfort you can provide on that tenancy ratio growth going forward would be great.

[Diego Galli, executive]

Yes, this is Diego. Yes, we are noticing an increased demand for fixed W access that is clearly driven by the increasing demand for data traffic. What we see at this moment is honestly on an acceleration of previous trends that this does without any, I would say, implication for the medium term for the rest. So we expect the same dynamic as in the original plan for MNOs.

[Operator]

Next question comes from Andrew Lee from Goldman Sachs.

[Andrew Lee, analyst]

Just my question really was revolving around the underlying or recurring revenue growth run rate, which has been suppressed in the last couple of quarters due to your inability to negotiate with your key customers like Vodafone and TI. Now that the deal is completed, have these discussions got back up to speed? And so -- and should we see underlying organic revenue growth back to previous levels, i.e. first half of '19? Should we see that organic revenue growth back to that -- those previous levels by Q2 of this year? Or will it take longer for you to reaccelerate to your targeted or guided underlying run rate?

[Giovanni Ferigo, executive]

Okay. Vodafone and TIM are completing the common grid designing. And so let me say, we have able to deliver all the demand that they will ask to us. I think that in the third -- fourth quarter, we will see the fees movement in very interesting organic growth.

Okay. There is no discussion about it. Now we have only to install -- to run, okay?

[Operator]

Next question is from Roshan Ranjit from Deutsche Bank.

[Roshan Ranjit, analyst]

Just looking at the pro forma data you provided for this quarter, it kind of implies, and correct me if I'm wrong here, the Vodafone underlying business was running at around 90% EBITDA margin. I mean given that as a tower company, you guys are certainly more -- a bit more efficient than the telcos. Is there scope for additional savings, additional synergies from the integration of the Vodafone business in addition to the, call it, EUR 200 million synergy target that you gave over the coming years?

[Diego Galli, executive]

Yes. No, I would say that at this stage, we can confirm the ambition on synergies that we have already committed to. We don't have any strong evidence at this stage to review what has been already communicated.

[Operator]

Next question is from Sam McHugh from Exane.

[Samuel McHugh, analyst]

I just wanted to follow up on your comments around the fixed wireless access providers, if I can. So I was just wondering if this was driven by independents like Linkem and EOLO or whether you were seeing demand from people like Fastweb or Wind Tre on the fixed wireless access side. And I wondered also to the second part of the question, presumably, they're using maybe less spectrum than the MNOs. So I wondered if that meant the electromagnetic radiation limits were perhaps easier to get around and whether you could tenant up the towers with fixed wireless access more than a traditional tower with MNOs on it.

[Diego Galli, executive]

Let me say, Wind Tre, finally has not exactly less spectrum that Vodafone and TIM -- it's less spectrum in the 5G environment. And then let me say, Wind Tre is completing the network with a lot of layer. And we are, let me say, in business with them to [ prosper ] where it's possible. So let me say this is one consideration. The second one is that the fixed wireless operator needs less power and bandwidth in the spectrum. So we think that we can offer in the space that Vodafone and TIM will not utilize to develop the 5G.

And so -- and in these days, the TIM and Vodafone, too, are pushing a lot on the fixed wireless services. So let me say, I don't see this kind of problem. We will manage with the possibility of the free space in terms of infrastructure, in terms of the electromagnetic spectrum. So we will continue to share our customer and where it's possible, let me say, the antenna of the fixed wireless are smaller and it's easier to install them where they want, okay?

[Samuel McHugh, analyst]

Have you seen anything from Fastweb at all? Or is it just the independent like the EOLOs and the Linkems and GOs of the world that you're servicing?

[Giovanni Ferigo, executive]

Yes. You know that generally, we don't comment on specific customers. Yes. So -- and -- yes, let me -- we see something from EOLO for sure. And -- but let's not go in more details. And I would say that this is a trend that was already included in the plan, but we have seen an acceleration and this happening -- has been happening faster than expected.

[Diego Galli, executive]

But regarding your question, let me take it faster. There is a new MNO in the context of the Italian regulatory. So let me say, it's the right to ask everything to us, okay?

[Emanuela Martinelli, executive]

I apologize again. We need to pause for a few seconds for interpreter to change over.

Next question?

[Operator]

Next question is from Mr. James Ratzer from New Street Research.

[James Ratzer, analyst]

Had a question about the OLO growth that you've reported in the quarter. I mean that seems to have slowed down to around kind of 2% to 3% year-on-year. It was running at kind of 8% to 9% in the second half of the year. I mean the tenancy growth we've just been talking about in the last few questions remained strong. So I was wondering specifically, what's driven that slowdown in revenue growth in Q1? If there was time for just a very quick follow-up. Are you able to give actually any financial guidance for 2020? I know you've given the kind of longer-term guidance, but are you going to be giving any near-term financial guidance?

[Giovanni Ferigo, executive]

I like -- remember that INWIT until the end of March has been under the stand-still period where it was impossible for us to sell hospitality. And in meantime, we have the antitrust of European Commission, let me say, pass that cost to us defined part in terms of hospitality. So the slower growth that you see is particularly due to these 2 phenomenons. Now there is all the issue of the remedies. And then are there some considerations for the financial? Diego, what can we see for the end of this year?

[Diego Galli, executive]

Yes. I would like also to clarify that actually, the slowdown was visible already in the last couple of quarters. This is a little bit a continuation of that. In addition, there is the change of the inflation on the TIM MSA where actually it was from 1.1% to 0.5% that has an impact in -- on the revenues as well. With regard to the guidance, yes, now we are -- we have a new management team and the new board as well. We are doing a new bottom-up exercise and operational plan. And yes, we will be in the condition to sharing guidance for 2020 around summer.

[James Ratzer, analyst]

Can I go back just to the OLO points? I mean you're seeing tenancy growth of 7% but revenue growth of 2%. So you're effectively seeing an ARPU dilution of 5%. Is that purely the loss of higher Wind tenants being replaced with fixed wireless access? I mean if so, when is that going to come to an end?

[Diego Galli, executive]

No, it isn't. Yes, there is a mix effect. You're right, that is diluting the average ARPU. It will -- this impact actually -- I mean it's good to see the growth for -- from fixed wireless. We are looking forward to see an acceleration for the other OLOs that will compensate and mitigate the mix impact and will bring OLO to a little bit higher revenue growth.

[James Ratzer, analyst]

So should we expect ARPU to stabilize on OLOs by year-end? Or is that, do you think, too optimistic?

[Diego Galli, executive]

There is -- we expect to see operational KPIs to accelerate in the next month, but this will take a little bit until it will be translated in revenue growth. So yes, Q4 is a realistic expectation.

[Operator]

Next question comes from Mr. Stefano Gamberini from Equita.

[Stefano Gamberini, analyst]

Just turning on this topic of 2020. Just to understand, if I'm not wrong, the reference target for the 2027 business plan was the pro forma revenues in the region of EUR 800 million, EBITDA margin in the region of 90%. Is this something that could be achievable considering the merger and the pro forma away from the beginning of '20? Or you think that this target could be changed substantially? And if I can add just regarding the figures you disclosed on the combined entity, could you give us also the number of the investments in the first quarter?

[Diego Galli, executive]

Sure. So your first question was related to the plan. And we feel comfortable on the overall of the plan and the trajectory of the plan. And we feel absolutely comfortable about the growth opportunities. The point is probably related to a slightly lower starting point as reflected in Q1. And now the point is how fast the revenue -- the higher revenue growth will be activated in the next month. And there is the time to -- can I say, time to market from order to build to revenues that takes a few months.

Let me -- can I say -- I cannot comment on the year-end guidance at this stage. As we said before, for summertime, we will have a clear guidance. On investments, you have seen the investments from INWIT. The investments from Vodafone were lower than the ones from INWIT.

[Operator]

Next question comes from Mr. Giorgio Tavolini from Intermonte.

[Giorgio Tavolini, analyst]

I would like to know about your exposure to inflation. I mean inflation should be the only escalator in the MSA agreement on revenues. And what portion on cost -- I mean you are net beneficiary in terms of margin, I guess, on -- to inflation, but I would like to double-check with you the net exposure.

[Diego Galli, executive]

On the -- MSA is 100% of the inflation with the floor at 0. On the cost side, that is mostly our main cost item is rental. That, as you know, now is treated according to the IFRS 16. The principle on the rent is related to the rent dynamic that is part on the way also we manage it. We are one of the main actor in the market. And as Giovanni said before, we have -- also as part of the new INWIT, there are strong expertise of people that have been working on that for -- in the past with very good results. So we are, how can I say, optimistic on the -- our ability to manage rental costs without any significant negative.

[Operator]

Next question comes from Mr. Luigi Minerva from HSBC.

[Luigi Minerva, analyst]

It's about the small cells and DAS and the backhauling activities. Can you give us an update on the size of the opportunity that you see from these relatively new areas of your business, for example, in 3 years from now, how much they could be worth compared to the total business of the company?

[Giovanni Ferigo, executive]

Okay. As you all know, we believe strongly in these new businesses, 3 businesses, because backhauling is totally necessary for the 5G rollout. And so we gained more than 1,000 links in our sites provided by optical link. And let me say, we are really in the moment that our customer will install the 5G antennas, okay, then we are ready to -- for a quickly link in optical fiber. So we believe strongly in this. And we will continue for the next year to install and to build new optical links.

Secondly, the small cell, the small cell is my passion. I believe strongly that in the future that this technical solution will be absolutely necessary for indoor coverage because the 5G frequencies probably will not be able to penetrate all the old, let me say, locations that are in our action cities and will help in outdoor environment, the team of capacity. The data growth is continuing to grow year-over-year. And so let me say, as the example of Sorrento demonstrate, we have a small cell in the central place of Sorrento that is managing interesting number of data.

So in the next 3 years, at the moment, let me say, the operator are totally concentrated in the 5G rollout. Okay. I think that if they will accelerate for the -- just for the next year, we will see something very in concrete. And for the next 3 years, it will be an important, let me say, source of revenues. Okay. We are ready to be compliant with every kind of technical request that our customer will do to us. And small cell and backhauling will do in this direction, okay?

[Luigi Minerva, analyst]

If I may follow up, do you see actually evidence currently of more request for small cells? Or the operators are rather still focused on squeezing more the macro cells?

[Giovanni Ferigo, executive]

Okay. Now the operators are totally concentrated in the macro cells. But for the indoor coverage, for example, for hospital, it is a very important issue that we covered 18 hospitals in this. And keep in mind that this kind of solution that I explained before are totally multi-operator, multi-tenant solution. So let me say, up to date, we are -- some demands in the special coverage like hospital, campus, we are starting in the mall and the luxury shops. Let me say, something is moving more than in the past. We did a technological investment because at the moment of the demand, we are ready because we cannot lost that time, okay?

[Operator]

Last question is from Mr. Giles Thorne from Jefferies.

[Giles Thorne, analyst]

It's actually a follow-up on the previous question. If I look back at the 2018 spectrum auction, there was obviously a huge amount of value ascribed by the mobile operators to the 700 megahertz and the 3.7 gigahertz blocks, and then a fraction was applied to the 26 gigahertz blocks. Considering that small cell deployments are going to be intimately linked to the deployment of millimeter wave spectrum like 26 gigahertz, does this not again tell you that small cell deployments of macro -- of millimeter wave spectrum are just not an immediate priority for the MNOs? And furthermore, is that really the investment case for deploying it, considering where Italian mobile competition really is? So I wanted to just stress test your bullishness on small cells a bit more.

[Giovanni Ferigo, executive]

Okay. Let me say, today, there's more -- today, the small cell are 4G and 5G ready. We are waiting for the final decision of our customer, if they will decide in 3.6 gigahertz or in [ 26-millimeter waves ]. Okay. In Europe, the market is totally different. As you can check in U.S.A., the millimeter waves have -- are having incredible development. But in Europe, let me say, the operators are discussing on. But our vendors that we choose are ready to plug and play for the 5G additional service, the frequencies that they will want or 26 gigahertz or 3.7 gigahertz.

So let me say, we are ready for the deployment that the operator will want to install. Let me say, the -- just a comment in the millimeter waves, okay. Keep in mind that a small cell must be installed at the maximum distance between the 2 of 150 meters. So let me say, the operators will be -- to -- will have to take a strong decision if they want to do alone. Keep in mind that we hold multi-tenant solution. And so we can, let me say, optimize our investments. So we are ready for millimeter waves or for 3.7 gigahertz. Okay. As the demand of our customer will arise, we have the solution, plug and play.

[Giles Thorne, analyst]

Yes. I appreciate you are ready. But I'm just wondering whether TIM and Vodafone can develop the business case for deploying that millimeter wave spectrum. You mentioned the United States. I don't need to tell anyone listening in the massive difference in ARPUs in the United States versus Italy. So you're absolutely certain that TIM and Vodafone, after they've done everything with 3.7 and 700, that they are going to deploy that 26 gigahertz. You're certain of that.

[Giovanni Ferigo, executive]

I cannot answer to this question because it is in charge of our operators. Okay. They paid this license. They paid not so little money for this frequency. And so let me say why not to use something that you acquired. So in my opinion, they will install because there are some 5G vertical service that will absolutely need the millimeter wave.

[Emanuela Martinelli, executive]

This was the last question from this first Q '20 results presentation. Thank you all for joining us and for your interest in our conference call. As usual, feel free to call us for any additional questions. Thank you, and enjoy your evening.

[Operator]

The conference call is over. Thank you for calling.